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Demonetisation: the good, the bad and the ugly

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By Dipankar Dasgupta

Tax evaders are not the only kind of people who inhabit the world. It is not hard to discover persons who do pay taxes. And apart from these, there is a third low-income category that is tax exempt. The propensities that drive the economic behaviour of the three classes are likely to differ. Yet there is a major similarity that bonds them together. All three groups use money, especially currency, for their daily survival. From where the cash that people carry in their pockets managed to arrive, however, unlike other forms of monetary assets, such as bank deposits, is quite unknown. Hence, cash carrying individuals are probably the softest of targets of those in charge of apprehending the dishonest.
The impact of the demonetisation policy, even though short term, was enormous, in so far as it affected the entire population of this billion plus nation. Hardly any other policy measure carried out in the country had made so many suffer so much for benefits that turned out to be so nebulous. The demonetisation drive may well be likened to a broad spectrum antibiotic administered to an undiagnosed bacteria afflicted patient. Even if the patient survives, the medicine destroys a whole lot of friendly bacteria living in the patient’s body.
Whatever the side effects may be, did demonetisation achieve its primary goal at least? The answer to the question depends on the goal itself. If the idea was to get rid of corruption and convert India into a nation brimming with piety, then demonetisation was a naive policy at best. Post-demonetisation events involving monumental fraud reveal that dishonesty will take a while yet to be weeded out. Nonetheless, viewing matters non-politically at least, the government may still be complimented for trying to achieve a romantic but worthwhile goal.
What went wrong? The professor, Arun Kumar, a noted expert on the black money problem, argues that only 1 per cent of black wealth is stored as cash. That is, even if evaded tax accrues initially as cash, such accruals swiftly metamorphose into other forms of wealth, such as real estate. Is it possible then that we were barking up the wrong tree?
It appears from the latest Reserve Bank of India report that the high denomination cash that the government had targeted, be it black or no, failed to disappear from the economy. Let us try and understand this more transparently and begin with cash at the very source of cash, otherwise referred to as the Reserve Bank of India. The RBI’s balance sheet, like all other balance sheets, has two sides to it, called respectively assets and liabilities. The assets consist of government bonds, foreign exchange, gold and a whole lot of other valuables. The liabilities are incurred by the bank on the basis of the assets it owns. For example, if the RBI holds $1 worth of foreign exchange, it may, if it pleases, issue rupee denominated cash liability of equal value. In fact, when a person purchases foreign exchange, he surrenders back an equivalent quantum of rupees created by the RBI. In the process, both the assets and the liabilities held by the bank go down by the same amount in value terms. Put differently, total assets of the central bank and its total liabilities must always be exactly equal. In accountancy language, this is referred to as double entry book-keeping.
What happens to the asset-liability balance when a government decree divests a major part of the cash created by the RBI of its legal tender status? Clearly, liabilities of the RBI go down overnight (as it literally did in late 2016), even as its aggregate assets remain unchanged. The principle of double entry book-keeping requires, however, that total assets and liabilities match. If therefore, the presumed black money hoarders fail to deposit back their cash to the banks and hence to the RBI (that is, if the cash vanishes away from the economy), the central bank ends up with assets exceeding its liabilities. The vanished cash is no longer its liability. The only way the hiatus can be removed is through the creation of new cash. To whose accounts will this new cash be credited? Surely not the accounts belonging to black money creators. The only organization that is ideally placed to benefit from the new cash is the law keeper itself that is the government (though it has been said that the route through which this can happen is not legally straightforward).
If the tax-evaded cash were to so transform into spendable funds of the government, yet another possible objective of the demonetisation drive should be fulfilled. A government that is deprived of its tax revenue finds it difficult to address development programmes. Demonetisation could well have been conceived as an indirect means for making the avoided taxes flow back to where they should have actually accumulated. In spite of the (short term) hardships inflicted on millions of innocent people, this goal could have been well worth reaching. Unfortunately, as the latest RBI report has revealed, that goal too turned into a chimera. Of the banned notes, 99.3 per cent has been deposited back into the system.
It does not require too much imagination to figure out that a good part of the notes deposited back were associated with the so-called black economy. To that extent, it is incorrect to say as yet that the government has failed in its mission. But it has only made its mission enormously more difficult. In its effort to climb the Everest, it has ended up with setting before itself the unenviable task of reaching the moon.
The department of direct taxes, one hears, is now engaged in following through all large deposits to the banks following demonetisation. It is not clear that the department is equipped with sufficient manpower and infrastructure to carry out the exercise. In fact, if it did possess such mind-boggling facilities, the black economy was unlikely to have existed at all. Tax authorities have been hoodwinked not merely during the present government’s tenure, but ever since time began.
Demonetisation had other objectives too, as the government has declared on occasion. One of these was to eliminate, as far as possible, cash-based transactions. The RBI report suggests that this objective, too, has probably not been achieved. As noted in the media, “19 months after the government banned… notes which made over half of the cash in the economy redundant, the currency with the public has more than doubled from a low of nearly Rs 7.8 lakh crore it had hit” following the demonetisation decision. In fact, currency with the public exceeds now its level prior to the demonetisation announcement. And amongst other interesting findings reported by the RBI, household savings held in the form of currency have reached their highest level since 2011.
Even if the wisdom underlying demonetisation is yet to be clearly detected, it’s best to conclude with a hopeful note. Being an economist who shies away from politics, this columnist wishes to believe that all is not lost. Policy design is no easy task. A particular policy may have failed to reach its objective, but nothing is permanent in this world.

 

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Opinion

Is the BJP really concerned about India’s poor?

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By Alf Gunvald Nilsen

On January 9, the upper house of India’s parliament – the Rajya Sabha – passed a constitutional amendment to lift the cap on reservations in education and public sector jobs from 50 to 60 percent. The next step is for the bill to receive presidential assent, but its fate is still somewhat uncertain, given the possibility that it might not withstand judicial scrutiny and be struck down by the country’s Supreme Court.

What is certain is that this initiative has proven deeply controversial. Opposition parties have criticised its legality, intent, and practicability, while public intellectuals such as Pratap Bhanu Mehta has labelled it cynical politics and cynical policy.

 

Reservations are what passes for affirmative action in the Indian context, and entail, simply put, a percentage of state and central government jobs and seats in higher educational institutions being reserved for Dalits and other lower caste groups. This form of affirmative action has colonial antecedents, and was written into the constitutional backbone of India’s political system after the coming of independence as a means of improving the condition of groups who were thought to be suffering from social and educational backwardness.

Reservations were initially limited to Dalits (Scheduled Castes) and Adivasis (Scheduled Tribes). However, in the early 1990s, in accordance with the recommendations of the Mandal Committee Report, reservations were expanded to encompass other lower caste groups (Other Backward Classes) as well. In 1992, the Supreme Court imposed the 50 percent cap on reservations, which is currently in the process of being overturned, avowedly to avoid compromising the constitutional principle of equal access.
What is crucial about the constitutional amendment that has now successfully made it through parliament is the fact that it is delinked from caste. The additional 10 percent of reserved jobs and seats in higher educational institutions that is to be introduced by removing the current 50 percent cap is intended to benefit what the Modi government refers to as “economically weaker sections” that do not fall under the categories Scheduled Caste, Scheduled Tribe, or Other Backward Classes – that is, so-called general category poor.

Economically weaker sections are defined as households with an annual family income of less than $11,345 (800,000 rupees) a year, who do not own more than two hectares of agricultural land or a house that is larger than 1,000 square feet.

However, as commentator Ajaz Ashraf has pointed out, upper caste groups are expected to benefit disproportionately from this policy measure, as their high levels of education, as well as their accumulated social capital, will most likely enable them to corner most of the benefits.

This is why Modi’s scheme has come to be scorned as “upper caste reservations” that erase the fact that, in India, affirmative action was introduced specifically to remedy the indignity of caste-based discrimination. In this regard, it is also significant, of course, that the economic criteria for eligibility have been defined in such a way that nearly all Indian households qualify – a fact that, according to Supreme Court lawyer Karuna Nundy, renders the constitutional amendment nothing less than ridiculous.

Modi is making this move in no small part due to an electoral imbroglio that is emerging from his project of authoritarian populism. His electoral success in 2014 was based on the fact that he and the Bharatiya Janata Party (BJP) managed to extend their base of support from the urban upper caste and middle class groups that have been the main supporters of Hindu nationalism in electoral politics to incorporate Other Backward Classes, Dalits, and Adivasis.

From 2016 onwards, this bloc began to crumble. Dalit and lower caste voters began to abandon the party, and Modi was the target of large-scale protests both by Dalits and farmers. Modi has attempted to stem this tide – for example by reversing the Supreme Court’s decision to relax the provisions of laws aimed to prevent violence and atrocities against Dalits – but this seems in turn to have resulted in the alienation of upper caste voters. As the 2019 general elections are looming on the horizon, Modi is now attempting to shore up the support of the BJP’s main vote base.

In doing so, he is appealing to upper caste and middle class groups who resent caste-based reservations due to the profoundly mistaken belief that affirmative action prevents social mobility based on merit. He is also attempting to appease Hindu nationalist hardliners who have recently called for caste-based reservations to be abandoned in favour of reservations based on economic criteria.

“Poverty does not see caste,” argues Desh Ratan Nigam – a leading activist with the Rashtriya Swayamsevak Sang, the BJP’s ideological parent-body – and therefore reservations should be based on economic criteria.

How should progressive forces in India respond to this initiative? A good starting place is to point out that Nigam is as wildly incorrect in his assertion that poverty does not see caste as he was in his ludicrous claim that the Taj Mahal – which was built by the Mughal emperor Shah Jahan – was in fact a Hindu temple.

According to the Oxford Poverty and Development Initiative, 65.8 percent of India’s Dalits, who predominantly earn a living as wage labourers, and 58.3 percent of the country’s lower castes are poor. By contrast, 33 percent of the rest of the Indian population are poor. The fact that poverty in India is structured in this way testifies to the truth of the claim made by Dalit intellectual Anand Teltumbde that “beneath the veneer of a modern developing superpower, India remains a republic of caste.”

Closely linked to this must be the argument that reservations were never intended to be an anti-poverty measure, and that it is therefore disingenuous when the BJP speaks of it as such. However, this point in turn needs to be connected to a progressive critique of the limitations of reservations for the politics of social justice. Again, Anand Teltumbde’s reflections are instructive.

Reservations, he argues in a recent interview, were never about rooting out caste – if that had been the intention, the caste system as such would have been abolished, which it was not. Moreover, the persistence of dramatically low social development indicators among Dalits suggests that reservations have done little to achieve progressive change even on their own terms. Advancing social justice for Dalits, he suggests, has to be linked to a struggle for universal social citizenship, which can grant access to healthcare, education, and secure livelihoods.

This perspective provides a way in which to link struggles against the injustice of caste with the political economy of inequality in India – a political economy that is writ large in the fact that in a country which has grown at an average rate of 7.3 percent since 2007, 57 billionaires own as much wealth as the bottom 70 percent of the country’s population, while at the same time India’s social development indicators are much weaker than those found in far poorer neighbouring countries.

Importantly, that link is already being forged by Dalit activists who couple claims for dignity and recognition with demands for social justice and redistribution, and it is quite possible that it is struggles such as this that can consign the republic of caste to the dust heap of history where it belongs.

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Opinion

A Chinese ‘re-education’

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By Muhammad Amir Rana

IN an interview with a Turkish television channel, Prime Minister Imran Khan completely sidestepped a question about the condition of Uighur Muslims in China’s western Xinjiang province. He admitted that he knew little about the issue, and, instead, preferred to focus on and highlight Chinese financial assistance and investment in Pakistan.

China is under stiff criticism for its alleged persecution of religious and ethnic minorities, especially Uighur Muslims. Freedom House’s 2018 country report on China classified it as ‘religiously-not-free’ on its freedom index. China is seriously concerned about this growing perception that hurts its efforts to promote a ‘soft image’ of China for a successful execution of its Belt and Road Initiative and other global commercial and strategic projects. Last week, China said that it welcomed UN officials to visit Xinjiang provided that they stay out of its internal affairs.

 

Pakistan usually avoids commenting on China’s internal affairs. But many Pakistani men, married to Chinese Uighur women, claim their spouses are being held in so-called re-education camps and are demanding their release. The issue has put Pakistan in a difficult position, mainly due to China’s huge investment in the country, as well as the extreme sensitivity of Chinese authorities to discussions on the subject.

Mystery continues to shroud the nature of the camps in Xinjiang.

Mystery continues to shroud China’s re-education camps, with authorities least interested in opening them up to independent observers. However, Chinese scholars claim that they are a part of the country’s countering violent extremism strategy, which was not built in isolation from rest of the world. They assert that China has designed its re-education strategy after carefully examining CVE approaches in practice in the West and Muslim world, which also employ similar community engagement programmes. Though they tend to justify their muscular approach by quoting examples from the Gulf, and South and Southeast Asian Muslim nations, the Chinese CVE strategy still appears highly politicised and opaque to Western practitioners and policymakers.

Much of the information about China’s re-education centres comes from West. Though the criticism has forced Chinese authorities to ‘release’ some information, it is insufficient to make a proper assessment. Last year, a state-run news agency published an interview of Shohrat Zakir, the Xinjiang governor, describing the camps as “professional vocational training institutions” for people influenced by terrorism and extremism who have not committed an offence warranting criminal punishment.

Similarly, in a seminar in China last November, local scholars explained China’s CVE approaches. Alluding to diverse and disparate CVE practices in different countries, they tended to conclude that no uniform or global CVE programme exists. One Chinese scholar presented a four-layered model based on the four principles of breaking, establishing, preventing and developing. ‘Breaking’ referred to isolating individuals from an extremist environment; ‘establishing’ meant introducing them to the true spiritual values of religion; ‘preventing’ was seen as educating; and ‘developing’ was interpreted as a skill development programme.

However, one of the best works available on the subject of China’s CVE strategy is by Zunyou Zhou, a Germany-based Chinese scholar. In a paper published in the Journal of Terrorism and Political Violence in 2017, he noted that the Chinese CVE strategy is based on multiple approaches and, interestingly, that they consulted Western CVE and deradicalisation approaches extensively and then built their own, more muscular model. The approaches include ‘five keys’, ‘four prongs’, ‘three contingents’, ‘two hands’ and ‘one rule’. Viewed together, these approaches point to legal, religious, cultural, ideological, and scientific aspects of the deradicalisation effort, implemented by governmental agencies, public institutions and non-governmental organisations in the region.

The Xinjiang government has developed several programmes to target different groups of people, including those who are ‘radicalised’ as well as those who are not but considered vulnerable to recruitment. The ‘five keys’ — ideological, cultural, customary, religious and legal — give a long-sustaining solution to terrorism. The ‘four prongs’ refer to a combination of four methods: ‘squeezing by correct faith’; ‘counteracting by culture’; ‘controlling by law’; and ‘popularising science’. ‘Squeezing by correct faith’ refers to clarifying people’s understanding of Islam while ‘counteracting by culture’ means seeking effective and practical solutions to thwart extremism and guiding people towards secularisation and modernisation. The ‘three contingents’ refer to the policy of reinforcing three main groups of people the government can count on to maintain stability and security. The ‘two hands’ refer to the one ‘firm hand’ that cracks down on terrorists, and the other ‘firm hand’ that educates and guides Uighur people, and the ‘one rule’ means the policy of ruling Xinjiang according to the law.

The author also provides historical background on the evolution of the Chinese CVE strategy and mentions that it materialised in a policy document entitled Several Guiding Opinions on Further Suppressing Illegal Religious Activities and Combating the Infiltration of Religious Extremism in Accordance with Law, issued by Xinjiang’s CCP Committee in May 2013. The policy document was also referred to as ‘No. 11 Document’, and described the borders between ethnic customs, normal religious practices and extremist manifestations.

For the CVE strategy’s smooth implementation, the Xinjiang authorities have introduced new legal regimes, and the latest amendment (titled ‘Regulation on Anti-Extremism’) was introduced in April 2017 to ban a wide range of extremist behaviours. Under the new legal framework, authorities have launched many programmes including deradicalisation for prisoners, and social programmes for those who have engaged in terrorism or extremism but do not deserve criminal punishment.

The re-education camps — or ‘rehabilitation centres’ — have been created as a part of China’s social programming. These centres run through civil society groups in Xinjiang or through ‘Fang Hui Ju’ working groups, dispatched by the regional government, comprising practitioners tasked with winning the hearts and minds of the people.

For CVE practitioners, the Chinese model may have a lot of substance to learn from. But the Uighur problem is more complex than religious extremism, as it has added dimensions of ethnic, cultural and political rights. For Pakistan, the Chinese CVE model offers nothing to learn from except to find a way of resolving the issue of Pakistani citizens’ spouses held in these camps.

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Opinion

Quota and bad faith

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By Christophe Jaffrelot, Kalaiyarasan A

The constitutional amendment by the Modi government in order to introduce a 10 per cent quota for the poor within the “general” category looks like an attempt, five months before general elections, at wooing upper caste voters longing for the jobs that were to be part of “acche din”. This is at odds with the initial rationale of India’s positive discrimination programmes, which were intended to make up for past oppression — and not as an employment scheme.

This is not the only recent move by the BJP to cash in on reservation. While the constitutional amendment does not mention caste, Maharashtra Chief Minister Devendra Fadnavis has taken up the previous Congress government’s idea in favour of reservation for Marathas, the largest dominant caste asking for quotas. These initiatives contradict the traditional Hindu nationalist stand, expressed in the name of merit, against positive discrimination. The latter even clashes with the Sangh’s formula that gained momentum during the Mandal affair: If reservation had to take place, it had to be according to economic criteria. None of these initiatives could bear fruit because of the systematic rejection by the judiciary of quotas beyond 50 per cent — Tamil Nadu being the only exception.

 

In contrast, the Yogi Adityanath government is revisiting the existing quotas in Uttar Pradesh in a much more effective manner. After assuming office in 2017, the state BJP government had appointed an OBC Social Justice Committee headed by Justice Raghvendra Kumar. The committee submitted its report in 2018, recommending that the 27 per cent quota for the OBCs should be dispatched between three sub-categories: The Backward Classes (BCs) would get 7 per cent of the reservations, the Very Backward Classes (VBCs) 9 per cent and the Most Backward Classes (MBCs) 11 per cent. Among the BCs figured nine jatis out of 79 — including Yadavs, Kurmis, Kalwars, Kalals and Kallars. Among the VBCs were found 33 jatis, including Gujjars, Lodhs, Kacchhis and Gadariyas. And among the MBCs, were 37 jatis, including Mallahs, Nishads and Rajbhars. This subcategorisation, which has already been implemented by other states including Bihar, was justified on the grounds that the BCs, also called the “aristocratic class” in the report, had cornered most of the reservation benefits at the expense of the others. However, this assumption is not substantiated by any data in the report. Similarly, the status of the OBC castes under review is qualified arbitrarily. For instance, the BCs are presented as members or former members of the “Vaishya caste, the caste in the third position of the Varna system”. They are also described as “similar to Brahmins and Kshatriyas”. In contrast, the MBCs are shown in an unfavourable light, as people who “believe in magic” and “regularly consume local liquor in the evening”.

Whether the BCs do benefit more from positive discrimination than other OBCs is very difficult to determine. In fact, this is exactly what the UP government should have tried to ascertain. But we can use the Indian Human Development Survey to come to an approximate response. It shows that between 2004-5 and 2011-12 most of the large OBC jatis have improved their economic situation in the same proportion. Their annual per capita income (APCI) has multiplied by roughly three times: The Kurmis’ APCI has jumped from Rs 9,286 to Rs 25,989 and is second only to the Brahmins (ahead of the APCI of the “other upper castes”); the Yadavs’ has increased from Rs 5,623 to Rs 17,894, that of the Kacchhis from Rs 5,238 to Rs 15,064, that of the Telis from Rs 4,708 to Rs 12,789 and that of the Nishads from Rs 3,396 to Rs 12,596. Those who are lagging behind are the Jats, whose APCI multiplied by only two, from Rs 8,307 to Rs 17,867, like the Lodhs (from Rs 5,616 to Rs 10,300), whereas the Gadariyas were below doubling their income (from Rs 9,512 to 16,016) and the Rajbhars did slightly better (from Rs 5,351 to Rs 12, 476).

The three categories in the report are not applicable from the point of view of the percentage of caste members occupying salaried jobs as well. For instance, in 2011-12 this proportion reached 13 per cent in the case of Gadariyas (VBCs), whereas it was below 6 per cent among Kurmis (BCs). Incidentally, the Kurmis could hardly be accused of cornering reservation if less than 6 per cent of them had a salaried job — whereas Yadavs may be a more plausible usual suspect with 14.5 per cent. For Kurmis, the correlation between reservation and caste achievements works more in the case of education, since 8.3 per cent of them graduated in 2011-12. But it does not work in the case of the Yadavs, who have apparently not benefited more than others from reservation in the university, as only 4.7 per cent of them were graduates in 2011-12 — not more than Telis.

In fact, most of the BCs are either farmers or agricultural labourers, like the rest of the OBCs. In 2011-12, that was the case of, respectively, 68 per cent and 15 per cent of Kurmis, 56 per cent and 17 per cent of the Yadavs. In fact, the edge the Kurmis and Yadavs have over the others is actually due to their over-representation among the farmers and their under-representation among the agricultural labourers. In contrast, among the Kacchhis 45 per cent were farmers and 34 per cent labourers, the Nishads, were respectively 16 and 54 per cent, the Rajbhars, 16 and 64 per cent and even the Jats 31 and 64 per cent. To make the OBCs more egalitarian, the issue to address is less-related to reservations than to the agrarian structure. But, to announce new sub-quotas to caste groups which have been marginalised is easier than land reform.

The methodology of the OBC Social Justice Committee was flawed for two other reasons. First, while it intended to do justice to the poor, it continued to rely on caste — not class — as the unit of analysis. This contradiction is obvious in the case of the BCs, whose quotas will be reduced at the expense of the poor Yadavs and Kurmis who will have to compete with affluent Yadavs and Kurmis for fewer jobs and fewer seats in the university system if the report under review is implemented. Second, the “creamy layer” concept is not mentioned even once in this report, whereas it would make sense to adjust this notion in order to solve, at least partly, the contradiction we have just mentioned.

UP’s case shows that the way the state government is revisiting India’s model of positive discrimination is as debatable as the initiatives of the Modi government at the Centre and the Fadnavis government in Maharashtra. All this does not mean that the system does not need to be reformed in order to promote equality — besides other policies, including land reform. Reservation is far from a panacea, and definitely not an employment scheme. Incidentally, Hardik Patel, the leader of the Patidars who are asking for reservation in Gujarat, is now saying that better agricultural prices may be more important than quotas.

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